There are several exchange traded funds (ETFs) available to offer investors exposure to many of the most attractive companies operating in frontier markets around the world. Frontier markets include countries that are in the earliest stages of political and economic development. They exist in contrast to emerging market economies, which include countries that have made substantial progress in the implementation of economic reform programs, helping to open domestic markets and increase economic growth.
While frontier markets present a lot of investment risk, they are also characterized by youthful populations and the possibility of fast economic growth.
Although they may be fairly risky, frontier markets have youthful populations and the possibility of fast economic growth.
Here's a look at three ETFs with broad-based exposure to frontier markets—the iShares MSCI Frontier 100 ETF (FM), the Invesco Frontier Markets ETF (FRN), and the Global X Next Emerging & Frontier ETF (EMFM). Unless otherwise indicated, all figures are current as of Jan. 14, 2020.
- There are ETFs that offer investors exposure to companies operating in frontier markets—countries in the earliest stages of political and economic development.
- The iShares MSCI Frontier 100 ETF is the largest and most liquid frontier market ETF available.
- The Invesco Frontier Markets ETF tracks the BNY Mellon New Frontier Index which is made up of frontier market stocks with depositary receipt listings on stock exchanges in the U.S. and on the LSE.
- The Global X Next Emerging & Frontier ETF seeks to match the results of the Solactive Next Emerging & Frontier Index, which tracks the performances of the frontier market and smaller emerging market equities.
1. The iShares MSCI Frontier 100 ETF
The iShares MSCI Frontier 100 ETF was launched in September 2012 to track the MSCI Frontier Markets 100 Index, which measures the performance of about 100 of the biggest and most liquid frontier market stocks in the world.
Component equities are weighted according to free-float market capitalization. This index is a subset of the broader MSCI Frontier Markets Investable Market Index, which tracks 253 small-, mid-, and large-cap equities in 28 frontier market countries—an index that covers 99% of the free float-adjusted market capitalization in each country represented.
In terms of geographical exposure, more than half of the fund's assets are allocated to just three countries—Kuwait at 28.22%, Vietnam at 11.43%, and Argentina at 11.02%. The ETF tilts heavily toward financial services stocks, which account for 53.12% of fund assets. Communication services stocks are allocated at 15.38%, followed by consumer staples stocks at 7.43% and real estate stocks at 6.82%. The top five holdings and their weightings are as follows:
- National Bank of Kuwait: 11.84%
- AHLI United Bank: 6.58%
- Kuwait Finance House: 5.22%
- Safaricom: 4.75%
- Itissalat Al Maghrib Ste SA: 4.61%
FM has underperformed its benchmark, with a 17.47% one-year return, a 2.57 five-year return. The fund returned 6.36% since its inception.
2. The Invesco Frontier Markets ETF
Launched in June 2008, the Invesco Frontier Markets ETF tracks the investment performance of the BNY Mellon New Frontier Index. This index is made up primarily of frontier market stocks that have depositary receipt listings on stock exchanges in the United States or on the London Stock Exchange (LSE). Stocks listed on exchanges within frontier market countries may also be included in the index if they meet market capitalization and trading volume requirements.
FRN has net assets of approximately $63.9 million and 54 holdings. The fund has a net expense ratio of 0.70%.
Holdings are spread across several countries, with the top three being Nigeria at 14.96%, Argentina at 14.94%, and Kenya at 11.35%. Much like FM, FRN is dominated by financial services stocks, which get a 39.05% allocation. Materials stocks are allocated at 13.04%, consumer discretionary at 11.75%, and communication services at 10.92%. The top five holdings in the fund are as follows:
- MercadoLibre: 10.79%
- KAZ Minerals PLC: 9.5%
- Bank Muscat SAOG: 7.84%
- Copa Holdings SA: 7.7%
- Safaricom PLC: 5.83%
Like FM, this fund has also underperformed its benchmark index, with a 20-64% one-year return, a 3.58% five-year return. It has returned -1.79% since inception.
3. The Global X Next Emerging & Frontier ETF
The Global X Next Emerging & Frontier ETF seeks to match the investment results of the Solactive Next Emerging & Frontier Index. This index is designed to track the performances of equities in frontier market countries and smaller emerging market countries.
To maintain a focus on smaller economies, the index excludes equities from six of the world's largest emerging countries—Brazil, Russia, India, China, South Korea, and Taiwan. Thus, while its scope is much broader than the frontier-focused ETFs described above, EMFM remains an interesting alternative for investors interested in exposure to less-developed markets.
The fund has $18.5 million in net assets invested in 198 stocks as of Sept. 30, 2019. EMFM has an expense ratio of 0.55%.
As of Sept. 30, 2019, about 75% of fund assets are allocated to emerging market equities, and the remaining assets are invested in frontier markets. Top geographic allocations to frontier markets include Thailand at 10.52%, Indonesia at 9.9%, and Saudi Arabia at 9.38%. The sector breakdown includes financial services stocks at 29.47%, followed by communication services at 16.61%, and consumer staples at 13.96%. The fund's top five holdings include:
- Naspers: 2.23%
- National Bank of Kuwait: 2.14%
- Walmart de Mexico: 2.01%
- Mobile Telecommunications: 1.92%
- Telekomunikasi Indonesia: 1.91%
EMFM has underperformed its benchmark index. It returned 6.05% in one year, -0.13% in five years, and -1.01% since inception.